UPM Annual Report 2017

Strategy

In brief

Businesses

Stakeholders

Governance

Accounts

PERFORMANCE PORTFOLIO 1 2 3 4 5 GROWTH INNOVATION RESPONSIBILITY

Risks and opportunities

The operating environment exposes UPM to a number of risks and opportunities. Many of them arise from general economic activity and global megatrends (see previous page). Execution of strategies exposes UPM and its business areas, functions and production plants to a number of risks and opportunities.

STRATEGIC FOCUS AREAS INVOLVED

RISK DESCRIPTION

IMPACT

MANAGEMENT

OPPORTUNITY

INFLUENCING TRENDS

Global economic cycles

Impacts the demand and sales prices of various UPM products and main input costs items, as well as currency exchange rates. UPM’s main earnings sensitivities are presented on page 122.

Industry-leading balance sheet. Continuous improvement in competitiveness, resource efficiency and customer offering. Business portfolio development. Continuous improvement in competitiveness. Focus on more attractive paper end-use segments. Adjust paper production capacity to profitable customer demand. Business portfolio development.

UPM’s strong balance sheet, focus on competitiveness and responsible operations mitigate risks and may present strategic opportunities (incl. M&A) in an economic downturn.

12 4 5

Faster than expected decline in demand for graphic paper

Increased pressure on UPM’s graphic paper deliveries and sales prices, scarcity of recycled fibre

UPM’s large paper production platform provides continuous optimisation opportunities. Reliable supplier of high quality products and customer service merits customer loyalty.

15

Overcapacity in some of UPM’s products due to changes in demand or supply

Temporarily impacts sales prices and deliveries of the product in question

Continuous improvement in competitiveness. Disciplined planning and selection of investments. Business portfolio development.

UPM’s diverse business portfolio, focus on competitiveness and strong balance sheet mitigate risks and may present strategic opportunities (incl. M&A) in a cyclical downturn of a business. UPM’s diverse business portfolio and geographical presence, focus on competitiveness and strong balance sheet mitigate risks and may present strategic opportunities in changing currency environment. UPM’s continuous improvement in resource efficiency and circular economy mitigate risks and offer competitive advantage. UPM’s diverse business portfolio, geographical presence and responsible business practices mitigate risks and may present opportunities for optimisation in case of trade barriers in some products and locations. May drive market growth for sustainable products and energy, e.g. renewable fuels. Resource efficiency, circular economy and renewability are increasingly important sources of competitive advantage. In electricity markets, hydropower is an increasingly important form of power generation. Increased wood growth in northern hemisphere.

12 5

Significant moves in currency exchange rates relevant for UPM

Impacts UPM’s earnings and cash flow directly and competitiveness indirectly. UPM’s main currency exposures are presented on page 148.

Continuous hedging of net currency exposure. Hedging the balance sheet. Continuous improvement in competitiveness. Disciplined planning and selection of investments. Business portfolio development. Continuously improving resource efficiency. New technologies. Long-term supply contracts and relying on alternate suppliers. Selected ownership of forest land and long-term forest management contracts. Monitoring through international trade associations. Compliance. Continuous improvement in competitiveness. Disciplined planning and selection of investments. Business portfolio development. Monitoring for early signals for regulation changes. Communicate the impacts of such policies on employment and creation of value-added clearly. Compliance. Continuous improvement in competitiveness, materials and energy efficiency. Leading environmental performance. Innovation and selected investments in value added renewable products and energy. Business portfolio development. Sustainable forest management and UPM biodiversity programme. Commercial strategies. Programmes for savings in variable and fixed costs. Culture and track record of continuous improvement in productivity and resource efficiency. Product and service development. Disciplined selection, planning, project management and follow-up processes. Investing in projects with attractive returns and sustainable competitive advantage. Ensuring that contractual obligations are met by both parties. Arbitration proceedings have been initiated by both parties. Disciplined acquisition preparation to ensure the strategic fit, right valuation and effective integration. Environmental and social impact assessments. Stakeholder engagement. Disciplined selection, development and commercialisation processes for innovations. Collaboration and partnerships in R&D and commercialisation. Business model development. Governance, compliance procedures, UPM Code of Conduct, UPM Supplier and Third Party Code, audits, whistleblowing channel, trainings. UPM Code of Conduct, UPM Supplier and Third Party Code, supplier audits, certification. Best available techniques (BAT). Maintenance, internal control and reports. Certified environmental management systems (ISO 14001, EMAS). One Safety system (p. 49). Loss prevention activities and systems. Emergency and business continuity procedures. Competence development. Incentive schemes. Workplace safety. Acting on employee engagement and management effectiveness. Value-based leadership and integrity. Technical, physical and process improvements to mitigate availability and security risks.

12 5

Availability and price of major production inputs like wood, fibre, chemicals and water

Increased cost of raw materials and potential production interruptions. UPM’s cost structure is presented on page 123 and sensitivity to water prices on page 106.

13 4 5

OPERATING ENVIRONMENT

International trade barriers, e.g. antidumping duties

Impacts trade flows and short-term market balances and may directly or indirectly impact sales prices and deliveries of UPM’s products. May distort markets, e.g. for energy or wood raw material. May change relative competitiveness of energy forms. May change relative competitiveness of countries. May create additional competition for wood raw material. Direct and indirect impacts of climate change. UPM’s sensitivity to carbon pricing is presented on page 106.

12 4 5

Changes in regulation, subsidies, taxation, e.g. related to climate policies

12 3 4 5

Continuous improvement in competitiveness

Weakening relative competitiveness impacts profitability and increases risks related to the external business environment (above).

Increasing relative competitiveness improves profitability and mitigates risks related to the external business environment (above).

13 4

Selection and execution of investment projects

Material cost overruns. Inopportune timing. Return on investment does not meet targets.

Carefully selected and implemented growth projects improve UPM’s ROCE and grow its earnings. UPM’s financial targets are presented on page 14.

2 4

Delays in OL3 nuclear plant project completion and start-up

Adverse impact on PVO’s business and financial position, the fair value of UPM’s energy holdings and the cost of energy sourced from OL3 when completed. Cost of acquisition proves high and/or targets for strategic fit and integration are not met. Return on investment does not meet targets. Damage to reputation.

The investment provides a competitive, safe and CO 2

emission-free

2 4

electricity supply for the long term.

Selection and execution of M&A

UPM’s strong balance sheet and cash flow enable value-enhancing M&A when timing and opportunity are right. Societal value creation. Existing products and services redesigned to bring more value. New value-added products to replace oil-based materials may be a significant source of value creation and growth for UPM. Good governance mitigates risks and promotes best practices. High responsibility standards and transparency are a differentiating factor and create long term value. Good governance and responsible sourcing practices mitigate risks and provide competitive advantage.

2 4 5

Developing and commercialising innovations and new businesses

Return on investment does not meet targets. Lost opportunity.

12 3 4

Compliance risks; competition law, anti-corruption, human rights, securities regulation, taxation

Damage to reputation. Loss of business. Fines and damages. May impact the value of the company.

12 4 5

Supply chain and third party reputation risks

Damage to reputation. Loss of business. Loss of competitive position. May impact the value of the company.

12 4 5

OPERATIONS AND STRATEGY

Environmental risks; a leak or spill due to malfunction or human error

Damage to reputation. Sanctions. Direct costs to clean up and repair potential damages to production plant. Loss of production. Harm to employees or contractors and damage to reputation. Damage to assets or loss of production.

Industry-leading environmental performance provides competitive advantage, including efficiency gains.

12 3 4 5

Physical damage to the people or property

Leading health and safety performance strengthens the brand as an employer, as well as improving engagement, efficiency and productivity. Engaged high-performing and diverse people enable the implementation of the Biofore strategy as well as commercial success. Sophisticated IT systems enable efficient operations, optimised performance as well as new customer services and data security.

14

Ability to recruit and retain diversely skilled employees

Business planning and execution impaired, affecting long-term profitability and value creation.

12 3 4 5

Availability and security of information systems, malware

Interruptions in critical information systems cause a major interruption to UPM’s business. Damage to reputation. Loss of business.

13 4

CONTENTS

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UPM Annual Report 2017

UPM Annual Report 2017